US Alliance 10-Q 2023 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023.

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________________ to _________________________________

Commission File Number: 000-55627

US ALLIANCE CORPORATION
(Exact name of registrant as specified in its charter)

Kansas	26-4824142
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1303 SW First American Pl, Suite 200, Topeka, Kansas	66604
(Address of principal executive offices)	(Zip Code)

(785) 228-0200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).        ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑ Emerging growth company ☐

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      ☐ Yes  ☒ No

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the exchange act. ☐

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $0.10 par value

7,748,922 shares outstanding

as of August 2, 2023

US ALLIANCE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I - Financial Information

Item	Item Description	Page
Item 1	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Comprehensive Income (Loss)	4
	Consolidated Statements of Changes in Shareholders' Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	8
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4	Controls and Procedures	37
Part II - Other Information
Item	Item Description	Page
Item 1	Legal Proceedings	38
Item 1A	Risk Factors	38
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3	Defaults Upon Senior Securities	38
Item 4	Mine Safety Disclosures	38
Item 5	Other Information	38
Item 6	Exhibits	39
	Signatures	40

2

1. FINANCIAL STATEMENTS

US Alliance Corporation

Consolidated Balance Sheets 

	June 30, 2023			December 31, 2022
	(unaudited)
Assets
Investments:
Available for sale fixed maturity securities (amortized cost: $71,863,138 and $70,615,724 as of June 30, 2023 and December 31, 2022, respectively)	$	66,806,217		$	65,316,077
Equity securities, at fair value		7,763,920			7,395,044
Limited partnership interests		262,000			-
Mortgage loans on real estate (net of allowance for credit losses of $34,611 as of June 30, 2023)		24,294,735			23,790,073
Other invested assets		2,165,653			1,760,777
Policy loans		37,228			34,980
Real estate, net of depreciation		1,359,005			1,373,716
Total investments		102,688,758			99,670,667
Cash and cash equivalents		3,897,749			4,091,507
Investment income due and accrued		2,363,115			2,086,365
Reinsurance related assets		185,542			125,549
Deferred acquisition costs, net		5,187,919			5,629,002
Value of business acquired, net		2,472,183			2,518,393
Property, equipment and software, net		292,330			132,475
Goodwill		277,542			277,542
Deferred tax asset, net of valuation allowance		3,294,522			3,294,522
Other assets		905,167			472,275
Total assets	$	121,564,827		$	118,298,297
Liabilities and Shareholders' Equity
Liabilities:
Policy liabilities
Deposit-type contracts	$	78,511,330		$	79,035,350
Policyholder benefit reserves		31,430,869			29,411,984
Dividend accumulation		117,236			121,687
Advance premiums		133,208			168,782
Total policy liabilities		110,192,643			108,737,803
Accounts payable and accrued expenses		997,943			448,805
Federal Home Loan Bank advance		1,000,000			1,000,000
Other liabilities		183,084			42,295
Total liabilities		112,373,670			110,228,903
Shareholders' Equity:
Common stock, $0.10 par value. Authorized 20,000,000 shares; issued and outstanding 7,748,922 and 7,746,922 shares as of June 30, 2023 and December 31, 2022, respectively		774,893			774,693
Additional paid-in capital		22,964,490			22,955,458
Accumulated deficit		(11,006,159	)		(11,819,637	)
Accumulated other comprehensive loss		(3,542,067	)		(3,841,120	)
Total shareholders' equity		9,191,157			8,069,394
Total liabilities and shareholders' equity	$	121,564,827		$	118,298,297

See Notes to Consolidated Financial Statements.

3

US Alliance Corporation

Consolidated Statements of Comprehensive Income (Loss)

	Six Months Ended June 30,					Three Months Ended June 30,
	2023		2022			2023			2022
	(unaudited)					(unaudited)
Income:
Premium income	$	6,602,485	$	6,726,209		$	3,261,160		$	3,363,953
Net investment income		3,289,494		2,570,687			1,783,884			1,419,065
Net investment gains (losses)		890,476		(2,154,307	)		543,374			(1,421,654	)
Other income		170,743		160,186			86,955			80,621
Total income		10,953,198		7,302,775			5,675,373			3,441,985
Expenses:
Death claims		1,719,533		1,525,175			777,831			727,887
Policyholder benefits		3,497,865		3,613,384			1,933,830			1,953,399
Increase in policyholder reserves		1,986,195		2,143,630			938,317			947,280
Commissions, net of deferrals		362,516		392,215			190,785			201,881
Amortization of deferred acquisition costs		691,711		581,904			324,589			306,206
Amortization of value of business acquired		46,210		46,210			23,105			23,105
Salaries & benefits		736,116		684,320			372,828			360,261
Other operating expenses		949,201		1,038,613			425,688			497,211
Total expense		9,989,347		10,025,451			4,986,973			5,017,230
Net income (loss)	$	963,851	$	(2,722,676	)	$	688,400		$	(1,575,245	)
Net income (loss) per common share, basic and diluted	$	0.12	$	(0.35	)	$	0.09		$	(0.20	)
Unrealized net holding gains (losses) arising during the period, net of tax		298,464		(6,376,041	)		(533,755	)		(3,157,631	)
Reclassification adjustment for losses included in net income (loss)		589		(769	)		-			(1,118	)
Other comprehensive income (loss)		299,053		(6,376,810	)		(533,755	)		(3,158,749	)
Comprehensive income (loss)	$	1,262,904	$	(9,099,486	)	$	154,645		$	(4,733,994	)

See Notes to Consolidated Financial Statements.

4

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity

Six and Three Months Ended June 30, 2023 and 2022 (unaudited)

								Accumulated
	Number of							Other
	Shares of		Common		Additional			Comprehensive			Accumulated
	Common Stock		Stock		Paid-in Capital			Income (Loss)			Deficit			Total
Balance, December 31, 2021		7,745,404	$	774,541	$	22,948,637		$	2,521,730		$	(8,663,152	)	$	17,581,756
Common stock issued, $7 per share		1,518		152		10,474			-			-			10,626
Costs associated with common stock issued		-		-		(3,653	)		-			-			(3,653	)
Other comprehensive loss		-		-		-			(6,376,810	)		-			(6,376,810	)
Net loss		-		-		-			-			(2,722,676	)		(2,722,676	)
Balance, June 30, 2022		7,746,922	$	774,693	$	22,955,458		$	(3,855,080	)	$	(11,385,828	)	$	8,489,243
Balance, December 31, 2022		7,746,922	$	774,693	$	22,955,458		$	(3,841,120	)	$	(11,819,637	)	$	8,069,394
Common stock issued, $7 per share		2,000		200		13,800			-			-			14,000
Costs associated with common stock issued		-		-		(4,768	)		-			-			(4,768	)
Other comprehensive income		-		-		-			299,053			-			299,053
Cumulative effect of changes in accounting principal		-		-		-			-			(150,373	)		(150,373	)
Net income		-		-		-			-			963,851			963,851
Balance, June 30, 2023		7,748,922	$	774,893	$	22,964,490		$	(3,542,067	)	$	(11,006,159	)	$	9,191,157

								Accumulated
	Number of							Other
	Shares of		Common		Additional			Comprehensive			Accumulated
	Common Stock		Stock		Paid-in Capital			Income / (Loss)			Deficit			Total
Balance, March 31, 2022		7,746,672	$	774,668	$	22,955,681		$	(696,331	)	$	(9,810,583	)	$	13,223,435
Common stock issued, $7 per share		250		25		1,725			-			-			1,750
Costs associated with common stock issued		-		-		(1,948	)		-			-			(1,948	)
Other comprehensive loss		-		-		-			(3,158,749	)		-			(3,158,749	)
Net loss		-		-		-			-			(1,575,245	)		(1,575,245	)
Balance, June 30, 2022		7,746,922	$	774,693	$	22,955,458		$	(3,855,080	)	$	(11,385,828	)	$	8,489,243
Balance, March 31, 2023		7,746,922	$	774,693	$	22,955,458		$	(3,008,312	)	$	(11,694,559	)	$	9,027,280
Common stock issued, $7 per share		2,000		200		13,800			-			-			14,000
Costs associated with common stock issued		-		-		(4,768	)		-			-			(4,768	)
Other comprehensive loss		-		-		-			(533,755	)		-			(533,755	)
Net income		-		-		-			-			688,400			688,400
Balance, June 30, 2023		7,748,922	$	774,893	$	22,964,490		$	(3,542,067	)	$	(11,006,159	)	$	9,191,157

See Notes to Consolidated Financial Statements.

5

US Alliance Corporation

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2023			2022
Cash Flows from operating activities:	(unaudited)
Net income (loss)	$	963,851		$	(2,722,676	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,727			22,407
Net gains realized on the sale of securities and net credit losses recognized in operations		(36,879	)		(623	)
Unrealized (gains) losses on equity securities		(356,444	)		1,463,629
Change in fair value of embedded derivative		(497,153	)		691,301
(Accretion) amortization of investment securities, net		(245,851	)		82,644
Deferred acquisition costs capitalized		(250,627	)		(229,519	)
Deferred acquisition costs amortized		691,710			581,904
Value of business acquired amortized		46,210			46,210
Interest credited on deposit type contracts		980,230			832,549
(Increase) decrease in operating assets:
Change in funds withheld		-			(1,055,238	)
Investment income due and accrued		(276,750	)		130,530
Reinsurance related assets		284,858			(647,898	)
Other assets		(432,892	)		(232,267	)
Increase (decrease) in operating liabilities:
Policyowner benefit reserves		2,018,885			2,153,260
Dividend accumulation		(4,451	)		1,499
Advance premiums		(35,574	)		1,582
Other liabilities		140,789			647,582
Accounts payable and accrued expenses		549,138			(465,607	)
Net cash provided by operating activities		3,562,777			1,301,269
Cash Flows from investing activities:
Purchase of fixed income investments		(4,388,722	)		(933,183	)
Purchase of equity investments		(114,548	)		(937,554	)
Purchase of limited partnership interests		(262,000	)		-
Purchase of mortgage investments		(2,844,209	)		(3,494,797	)
Purchase of other invested assets		(247,232	)		-
Proceeds from fixed income sales and repayments		3,225,551			662,943
Proceeds from equity sales		348,298			422,909
Proceeds from mortgage repayments		2,192,464			3,084,662
(Increase) decrease in policy loans		(2,248	)		123,696
Purchase of property, equipment and software		(168,871	)		(56,401	)
Net cash used in investing activities		(2,261,517	)		(1,127,725	)
Cash Flows from financing activities:
Receipts on deposit-type contracts		3,269,039			3,365,026
Withdrawals on deposit-type contracts		(4,773,289	)		(1,028,046	)
Repayment of FHLB advance		-			(1,000,000	)
Proceeds received from issuance of common stock, net of costs of issuance		9,232			6,973
Net cash provided by (used in) financing activities		(1,495,018	)		1,343,953
Net increase (decrease) in cash and cash equivalents		(193,758	)		1,517,497
Cash and Cash Equivalents:
Beginning		4,091,507			7,955,348
Ending	$	3,897,749		$	9,472,845

See Notes to Consolidated Financial Statements.

6

US Alliance Corporation

Supplemental Cash Flow Information

	Six Months Ended June 30,
	2023		2022
Supplemental Disclosure of Non-Cash Information	(unaudited)
Funds withheld assumed deposits on deposit-type contracts	$	-	$	601,270
Funds withheld assumed withdrawals on deposit-type contracts		-		(569,616	)
Commissions and expense allowances deducted from funds withheld		-		(950,700	)

7

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Note 1.   Description of Business and Significant Accounting Policies

Description of business: US Alliance Corporation ("USAC") was formed as a Kansas corporation on April 24, 2009 to raise capital to form a new Kansas-based life insurance company. Our offices are located at 1303 SW First American Place, Suite 200, Topeka, Kansas 66604. Our telephone number is 785-228-0200 and our website address is www.usalliancecorporation.com.

USAC has five wholly-owned operating subsidiaries. US Alliance Life and Security Company ("USALSC") was incorporated June 9, 2011, to serve as our life insurance company. US Alliance Marketing Corporation ("USAMC") was incorporated April 23, 2012, to serve as a marketing resource. US Alliance Investment Corporation ("USAIC") was incorporated April 23, 2012 to serve as investment manager for USAC and its subsidiaries. Dakota Capital Life Insurance Company (“DCLIC”), was acquired on August 1, 2017 when USAC merged with Northern Plains Capital Corporation (“NPCC”). US Alliance Life and Security Company - Montana ("USALSC-Montana"), was acquired December 14, 2018. Both DCLIC and USALSC-Montana are wholly-owned subsidiaries of USALSC. Unless the context otherwise indicates, references in this registration statement to "we", "us", "our", or the "Company" refer collectively to USAC and its subsidiaries.

The Company terminated its initial public offering on February 24, 2013. During the balance of 2013, the Company achieved approval of an array of life insurance and annuity products, began development of various distribution channels and commenced insurance operations and product sales. The Company sold its first insurance product on May 1, 2013. The Company continued to expand its product offerings and distribution channels throughout 2014 and 2015. On February 24, 2015, the Company commenced a warrant exercise offering set to expire on February 24, 2016. On February 24, 2016, the Company extended the offering until February 24, 2017 and made additional shares available for purchase. All outstanding warrants associated with this offering expired on April 1, 2016. The Company further extended this offering to February 24, 2024. During the fourth quarter of 2017, the Company began a private placement offering to accredited investors in the state of North Dakota.

USALSC received a Certificate of Authority from the Kansas Insurance Department ("KID") effective January 2, 2012, and sold its first insurance product on May 1, 2013. DCLIC received a Certificate of Authority from the North Dakota Insurance Department ("NDID") effective January 24, 2012.

USALSC and DCLIC seek opportunities to develop and market additional products.

The Company’s business model also anticipates the acquisition by USAC and/or USALSC of other insurance and insurance related companies, including third-party administrators, marketing organizations, and rights to other blocks of insurance business through reinsurance or other transactions.

Basis of presentation: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.

The results of operation for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ended December 31, 2023 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to financial statements prepared in accordance with US GAAP, but which are not required for interim reporting purposes, has been condensed or omitted. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in USAC’s report on Form 10-K and amendments thereto for the year ended December 31, 2022.

Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated from the consolidated financial statements.

Area of Operation: US Alliance Life and Security Company is authorized to operate in the states of Kansas, North Dakota, Missouri, Nebraska, Oklahoma, Wyoming, South Dakota, Montana, Utah, Kentucky, Alabama, Mississippi, Ohio, New Mexico, and Texas. DCLIC is authorized to operate in the states of North Dakota and South Dakota. USALSC-Montana is authorized to operate in the state of Montana.

8

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Common stock and income (loss) per share: The par value for common stock is $0.10 per share with 20,000,000 shares authorized. As of June 30, 2023, and December 31, 2022, USAC had 7,748,922 and 7,746,922 common shares issued and outstanding, respectively.

Income (loss) per share attributable to USAC’s common stockholders were computed based on the net income (loss) and the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the six months ended June 30, 2023 and 2022 were 7,747,172 and 7,746,069 shares, respectively. The weighted average number of shares outstanding during the three months ended June 30, 2023 and 2022 were 7,747,589 and 7,746,755 shares, respectively. Potential common shares are excluded from the computation when their effect is anti-dilutive. There was no difference between basic and diluted net loss per common share for the three and six months ended June 30, 2023 and 2022.

New accounting standards:

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued updated guidance for the accounting for credit losses for financial instruments.  The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

9

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

The updated guidance was effective for reporting periods beginning after December 15, 2019.  Early adoption was permitted for reporting periods beginning after December 15, 2018.  The Company qualifed as an emerging growth comapny prior to December 31, 2022 and as such, had elected to defer implementation of this standard to fiscal years beginning after December 15, 2022. The adoption of this guidance is reflected in the Consolidated Statements of  Changes in Shareholders Equity and was not material.

Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the FASB issued ASU 2018-12 Financial Services-Insurance (Topic 944) - Targeted Improvements to the Accounting for Long-Duration Contracts. This update is aimed at improving the Codification related to long-duration contracts which will improve the timeliness of recognizing changes
in the liability for future policy benefits, simplify accounting for certain market-based options, simplify the amortization of deferred acquisition costs, and improve the effectiveness of required disclosures. These updates were originally required to be applied retrospectively to the earliest period presented in the
financial statements for periods beginning after December 15, 2020. The FASB recently delayed the effective date of ASU 2018-12 to periods beginning after December 15, 2024 for smaller reporting companies, with early adoption permitted. The Company is currently evaluating the impact of this
guidance on the Company's financial condition and results of operations. 

In December 2022, the FASB issued amendments (Accounting Standards Update 2022-5) to Accounting Standards Update 2018-12 (Targeted Improvements for Long-Duration Contracts) that originally required an insurance entity to apply a retrospective transition method as of the beginning of the earliest period
presented or the beginning of the prior fiscal year if early application was elected. This updated guidance reduces implementation costs and complexity associated with the adoption of targeted improvements in accounting for long-duration contracts that have been derecognized in accordance with Accounting
Standards Update 2018-12 before the delayed effective date. Without the amendments in this Update, an insurance entity would be required to reclassify a portion of gains or losses previously recognized in the sale or disposal of insurance contracts or legal entities because of the adoption of a new accounting
standard. Because there is no effect on an insurance entity's future cash flows, this reclassification may not be useful to users of financial information. The amendments in this guidance are effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are evaluating the effect
this standard will have on our Consolidated Financial Statements.

All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent or material to the Company at this time.

10

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Note 2.   Investments

Fixed Maturity

The amortized cost and fair value of available for sale investments as of June 30, 2023 and December 31, 2022 is as follows:

	June 30, 2023
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(unaudited)
Available for sale:
Fixed maturities:
US Treasury securities	$	786,260	$	-	$	(59,515	)	$	726,745
Corporate bonds		19,286,073		3,993		(2,918,435	)		16,371,631
Municipal bonds		6,218,178		7,116		(596,541	)		5,628,753
Redeemable preferred stock		3,627,683		-		(411,828	)		3,215,855
Term loans		18,191,123		31,348		(157,149	)		18,065,322
Mortgage backed and asset backed securities		23,753,821		222,540		(1,178,450	)		22,797,911
Total available for sale	$	71,863,138	$	264,997	$	(5,321,918	)	$	66,806,217

	December 31, 2022
	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Available for sale:
Fixed maturities:
US Treasury securities	$	993,805	$	36,313	$	(5,031	)	$	1,025,087
Corporate bonds		19,018,738		722		(3,150,382	)		15,869,078
Municipal bonds		6,228,636		-		(808,227	)		5,420,409
Redeemable preferred stock		3,875,526		-		(519,911	)		3,355,615
Term loans		18,086,124		209,989		(146,395	)		18,149,718
Mortgage backed and asset backed securities		22,412,895		157,795		(1,074,520	)		21,496,170
Total available for sale	$	70,615,724	$	404,819	$	(5,704,466	)	$	65,316,077

The amortized cost and fair value of debt securities as of June 30, 2023 and December 31, 2022, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	As of June 30, 2023				As of December 31, 2022
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(unaudited)
Amounts maturing in:
One year or less	$	-	$	-	$	442,846	$	450,461
After one year through five years		17,284,997		17,076,966		17,048,721		17,035,270
After five years through ten years		6,230,771		6,085,051		5,498,364		5,340,498
More than 10 years		20,965,866		17,630,434		21,337,372		17,638,063
Redeemable preferred stocks		3,627,683		3,215,855		3,875,526		3,355,615
Mortgage backed and asset backed securities		23,753,821		22,797,911		22,412,895		21,496,170
Total amortized cost and fair value	$	71,863,138	$	66,806,217	$	70,615,724	$	65,316,077

11

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Proceeds from the sale of securities, maturities, and asset paydowns in the six months ended June 30, 2023 and 2022 were $5,766,313 and $4,170,514, respectively. With the implementation of CECL, changes in the allowance for credit losses is included in net gains (losses).  Realized gains and losses related to the sale of securities and net credit losses recognized in income are summarized as follows:

	Six Months Ended June 30,
	(unaudited)
	2023			2022
Gross gains	$	9,857		$	3,164
Gross losses		(88,740	)		(2,541	)
Realized gains (losses)	$	(78,883	)	$	623
Mortgage loans on real estate		115,762			-
Decrease in allowance for credit losses	$	115,762		$	-

Proceeds from the sale of securities, maturities, and asset paydowns in the three months ended June 30, 2023 and 2022 were $4,030,195 and $1,128,044, respectively. With the implementation of CECL, changes in the allowance for credit losses is included in net gains (losses).  Realized gains and losses related to the sale of securities and net credit losses recognized in income are summarized as follows:

	Three Months Ended June 30,
	(unaudited)
	2023			2022
Gross gains	$	-		$	1,264
Gross losses		(263,968	)		-
Net security losses	$	(263,968	)	$	1,264
Mortgage loans on real estate		102,537			-
Decrease in allowance for credit losses	$	102,537		$	-

12

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Gross unrealized losses by duration are summarized as follows:

	Less than 12 months					Greater than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
	(unaudited)
June 30, 2023
Available for sale:
Fixed maturities:
US Treasury securities	$	726,745	$	(59,515	)	$	-	$	-		$	726,745	$	(59,515	)
Corporate bonds		2,756,472		(182,014	)		13,107,572		(2,736,421	)		15,864,044		(2,918,435	)
Municipal bonds		2,184,086		(87,433	)		3,075,544		(509,108	)		5,259,630		(596,541	)
Redeemable preferred stock		209,131		(9,974	)		2,944,473		(401,854	)		3,153,604		(411,828	)
Term loans		8,701,430		(157,149	)		-		-			8,701,430		(157,149	)
Mortgage backed and asset backed securities		10,355,775		(439,055	)		4,186,792		(739,395	)		14,542,567		(1,178,450	)
Total fixed maturities	$	24,933,639	$	(935,140	)	$	23,314,381	$	(4,386,778	)	$	48,248,020	$	(5,321,918	)

	Less than 12 months					Greater than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
December 31, 2022
Available for sale:
Fixed maturities:
US Treasury securities	$	398,375	$	(5,031	)	$	-	$	-		$	398,375	$	(5,031	)
Corporate bonds		12,378,486		(1,883,706	)		3,206,913		(1,266,676	)		15,585,399		(3,150,382	)
Municipal bonds		4,711,896		(587,053	)		708,514		(221,174	)		5,420,410		(808,227	)
Redeemable preferred stock		2,384,771		(363,193	)		970,844		(156,718	)		3,355,615		(519,911	)
Term loans		6,309,005		(146,395	)		-		-			6,309,005		(146,395	)
Mortgage backed and asset backed securities		10,358,560		(458,754	)		3,281,132		(615,766	)		13,639,692		(1,074,520	)
Total fixed maturities	$	36,541,093	$	(3,444,132	)	$	8,167,402	$	(2,260,334	)	$	44,708,495	$	(5,704,466	)

Unrealized losses occur from market price declines due to changes in interest rates.  The total number of available for sale fixed maturity securities in the investment portfolio in an unrealized loss position as of June 30, 2023 was 235, which represented an unrealized loss of $5,321,918 of the aggregate carrying value of those securities. The 235 securities breakdown as follows: 133 bonds, 75 mortgage and asset backed securities, 11 term loans, and 16 redeemable preferred stock. The total number of available for sale securities in the investment portfolio in an unrealized loss position as of December 31, 2022 was 230, which represented an unrealized loss of $5,704,466 of the aggregate carrying value of those securities. The 230 securities breakdown as follows: 131 bonds, 73 mortgage and asset backed securities, 10 term loans, and 16 redeemable preferred stock. 

13

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Mortgage Loans on Real Estate

The Company has invested in various mortgage loans through participation agreements with the original issuing entity.  The Company’s mortgage loans by property type as of June 30, 2023 and December 31, 2022 are summarized as follows:

	June 30, 2023			December 31, 2022
	(unaudited)
Commercial mortgage loans by property type
Condominium	$	1,776,547		$	1,696,975
Land		1,902,277			1,902,277
Multi-property		9,514,050			9,539,738
Multi-family		5,660,758			5,016,424
Retail/Office		5,475,714			5,634,659
Total commercial mortgages	$	24,329,346		$	23,790,073
Allowance for credit losses		(34,611	)		-
Carrying value	$	24,294,735		$	23,790,073

The Company utilizes loan-to-value of individual mortgage loans to evaluate the credit quality of its mortgage loan portfolio.  The loan-to-value measures the loan's carrying value to its appraised value.  The Company’s mortgage loans by loan-to-value ratio as of June 30, 2023 and December 31, 2022 are summarized as follows:

	June 30, 2023			December 31, 2022
	(unaudited)
Loan to value ratio
Over 70 to 80%	$	8,214,050		$	8,219,763
Over 60 to 70%		4,276,547			5,196,975
Over 50 to 60%		5,330,127			4,682,750
Over 40 to 50%		4,055,181			3,235,951
Over 20 to 30%		1,300,000			1,319,975
Over 10 to 20%		1,153,441			1,134,659
Total	$	24,329,346		$	23,790,073
Allowance for credit losses		(34,611	)		-
Carrying value	$	24,294,735		$	23,790,073

The Company’s mortgage loans by maturity date as of June 30, 2023 and December 31, 2022 are summarized as follows:

	June 30, 2023			December 31, 2022
	(unaudited)
Maturity Date
One year or less	$	19,523,001		$	15,354,542
After one year through five years		4,806,345			8,435,531
Total	$	24,329,346		$	23,790,073
Allowance for credit losses		(34,611	)		-
Carrying value	$	24,294,735		$	23,790,073

14

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

The Company evaluates its commercial mortgage loan portfolio for the establishment of a loan loss allowance by specific identification of impaired loans. A mortgage loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If the Company determines that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.  The Company had no mortgage loans that were on non-accrued status as of June 30, 2023 and December 31, 2022.  The were no mortgage loans delinquent on payments due the Company as of June 30, 2023 and December 31, 2022. 

The Company analyzes our commercial mortgage loan portfolio for the need of a general loan allowance for expected credit losses on all other loans on a quantitative and qualitative basis by grouping assets with similar risk characteristics when there is not a specific expectation of a loss for an individual loan. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions. The Company does not measure a credit loss allowance on accrued interest receivable as we write off any uncollectible accrued interest receivable balance to net investment income in a timely manner. The Company did not charge off any uncollectible accrued interest receivable on our commercial mortgage loan portfolio during the three and six month periods ended June 30, 2023 and June 30, 2022.

The Company's commercial mortgage loans are pooled by risk rating and property collateral type and an estimated loss ratio is applied against each risk pool. The loss ratios are generally based upon historical loss experience for each risk pool and are adjusted for current and forecasted economic factors management believes to be relevant and supportable. Economic factors are forecasted for two years with immediate reversion to historical experience.

The following table presents a roll-forward of our specific and general valuation allowances for our commercial mortgage loan portfolio:

	Six Months Ended June 30, 2023
	(unaudited)
	Specific Allowance		General Allowance
Beginning allowance balance	$	-	$	-
Cumulative adjustment for changes in accounting principle		-		150,373
Charge-offs		-		-
Recoveries		-		-
Change in provision for credit losses		-		(115,762	)
Ending Allowance	$	-	$	34,611

The specific allowance represents the total credit loss allowances on loans which are individually evaluated for impairment. The general allowance is for the group of loans discussed above which are collectively evaluated for impairment.

Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the loan's carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of other investments and the loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. Recoveries are situations where the Company has received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance). The Company did not own any real estate related to our mortgage participations during the six months ended June 30, 2023 and 2022.

15

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Investment Income, Net of Expenses

The components of net investment income for the six months ended June 30, 2023 and 2022 are as follows:

	Six Months Ended June 30,
	2023			2022
	(unaudited)
Fixed maturities	$	2,895,537		$	559,262
Mortgages		1,003,013			116,350
Equity securities		394,800			312,498
Funds withheld		-			1,621,509
Other invested assets		100,865			-
Cash and cash equivalents		35,960			5,471
		4,430,175			2,615,090
Less investment expenses		(1,140,681	)		(44,403	)
	$	3,289,494		$	2,570,687

The components of net investment income for the three months ended June 30, 2023 and 2022 are as follows:

	Three Months Ended June 30,
	2023			2022
	(unaudited)
Fixed maturities	$	1,856,114		$	283,929
Mortgages		493,991			88,959
Equity securities		184,430			157,824
Funds withheld		-			921,201
Other invested assets		54,925			-
Cash and cash equivalents		21,939			5,011
		2,611,339			1,456,924
Less investment expenses		(827,515	)		(37,859	)
	$	1,783,884		$	1,419,065

Net Investment Gains (Losses)

Accounting standards require that the unrealized gains and losses on equity securities be reported as income on the consolidated statements of comprehensive income (loss). For the six months ended June 30, 2023, net investment gains is comprised of $356,444 of unrealized gains on our equity portfolio, net realized gains including net credit losses recognized of $36,879, and a gain on the unrealized change in the fair value of our embedded derivative of $497,153. For the six months ended June 30, 2022, net investment losses is comprised of $1,463,629 of unrealized losses on our equity portfolio, net realized gains of $623 and a loss on the change in the fair value of our embedded derivative of $691,301.

For the three months ended June 30, 2023, net investment gains is comprised of $110,318 of unrealized gains on our equity portfolio, net realized losses including net credit losses recognized of $161,431, and a gain on the unrealized change in the fair value of our embedded derivative of $594,487. For the three months ended June 30, 2022, net investment losses is comprised of $1,013,834 of unrealized losses on our equity portfolio, net realized gains of $1,264 and a loss on the change in the fair value of our embedded derivative of $409,083.

16

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Note 3.   Derivative Instruments

Types of Derivatives used by the Company

The Company’s derivatives consists of embedded derivatives on funds withheld on coinsurance assets which was eliminated in October 2022 and a reinsurance contract allocated hedge which was acquired in October 2022.

Summary of Derivative Positions

The fair value of the Company’s derivative financial instruments on the consolidated balance sheets is as follows:

	June 30, 2023				December 31, 2022
	Derivative				Derivative				Balance
	Asset		Liability		Asset		Liability		Reported In
Derivatives:	(Unaudited)
Embedded derivatives:
Reinsurance contract allocated hedge	$	1,013,677		-	$	724,998	$	-	Reinsurance related assets

The following table shows the change in the fair value of the derivative financial instruments in the consolidated statements of comprehensive income:

	Six Months Ending		Six Months Ending			Balance
	June 30, 2023		June 30, 2022			Reported In
	(unaudited)		(unaudited)
Derivatives:
Embedded derivatives:
Change in funds withheld embedded derivative	$	-	$	(691,300	)	Net investment gains (losses)
Change in reinsurance contract allocated hedge	$	497,153	$	-		Net investment gains (losses)

17

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Note 4.   Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

● Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement rate.

● Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

● Level 3 inputs are unobservable for the asset or liability and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Investments, available for sale: Fair values of available for sale fixed maturity securities are provided by a third party pricing service. The pricing service uses a variety of sources to determine fair value of securities. The Company’s fixed maturity securities are highly liquid, which allows for a high percentage of the portfolio to be priced through pricing sources.

Equity securities: Fair values for equity securities are also provided by a third party pricing service and are derived from active trading on national market exchanges.

Embedded derivative: The fair value of embedded derivatives associated with funds withheld reinsurance treaty is determined upon a total return swap technique with reference to the fair value of the investments held by the ceding company that support the Company’s funds withheld asset with an adjustment for a credit valuation adjustment. The fair value of the underlying assets is generally based upon market observable inputs with industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered level 3 in the fair value hierarchy. The Company’s utilization of a credit-valuation adjustment did not have a material effect on the change in fair value of the embedded derivative for the three and six months ended June 30, 2023 and 2022.

18

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

The table below presents the amounts of assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022:

	June 30, 2023
	Total		Level 1		Level 2		Level 3
	(unaudited)
Fixed maturities:
US Treasury securities	$	726,745	$	726,745	$	-	$	-
Corporate bonds		16,371,631		-		16,195,631		176,000
Municipal bonds		5,628,753		-		5,628,753		-
Redeemable preferred stock		3,215,855		-		3,215,855		-
Term loans		18,065,322		-		-		18,065,322
Mortgage backed and asset backed securities		22,797,911		-		22,310,411		487,500
Total fixed maturities		66,806,217		726,745		47,350,650		18,728,822
Equities:
Common stock		6,335,701		6,239,301		96,400		-
Preferred stock		1,428,219		-		1,428,219		-
Total equities		7,763,920		6,239,301		1,524,619		-
Other invested assets		2,165,653		-		-		2,165,653
Total	$	76,735,790	$	6,966,046	$	48,875,269	$	20,894,475

	December 31, 2022
	Total		Level 1		Level 2		Level 3
Fixed maturities:
US Treasury securities	$	1,025,087	$	1,025,087	$	-	$	-
Corporate bonds		15,869,078		-		15,687,478		181,600
Municipal bonds		5,420,409		-		5,420,409		-
Redeemable preferred stock		3,355,615		-		3,355,615		-
Term loans		18,149,718		-		-		18,149,718
Mortgage backed and asset backed securities		21,496,170		-		21,099,920		396,250
Total fixed maturities		65,316,077		1,025,087		45,563,422		18,727,568
Equities:
Common stock		6,024,224		5,929,624		94,600		-
Preferred stock		1,370,820		-		1,370,820		-
Total equities		7,395,044		5,929,624		1,465,420		-
Other invested assets		1,760,777		-		-		1,760,777
Total	$	74,471,898	$	6,954,711	$	47,028,842	$	20,488,345

19

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:

				Mortgage
For the Six Months Ended June 30, 2023	Corporate			Backed		Term			Hedge
(unaudited)	Bonds			Securities		Loans			Derivative
Fair value, beginning of period	$	181,600		$	396,250	$	18,149,718		$	724,998
Principal payment		(5,600	)		-		(247,883	)		-
Acquisition		-			-		162,443			-
Investment related gains		-			91,250		1,044			288,679
Fair value, end of period	$	176,000		$	487,500	$	18,065,322		$	1,013,677

			Mortgage
For the Three Months Ended June 30, 2023	Corporate		Backed		Term			Hedge
(unaudited)	Bonds		Securities		Loans			Derivative
Fair value, beginning of period	$	176,000	$	393,750	$	18,154,908		$	726,077
Principal payment		-		-		(112,841	)		-
Acquisition		-		-		52,606			-
Investment related gains (losses), net		-		93,750		(29,351	)		287,600
Fair value, end of period	$	176,000	$	487,500	$	18,065,322		$	1,013,677

The Company discloses the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:

Cash and cash equivalents: The carrying amounts approximate fair value because of the short maturity of these instruments.

Investment income due and accrued: The carrying amounts approximate fair value because of the short maturity of these instruments.

Mortgage loans on real estate: Mortgage loans are carried at their unpaid principal value as that is considered the fair market values for these loans less an allowance for credit losses.

Reinsurance contract allocated hedge: The carrying value of funds withheld at interest approximates fair value as funds are specifically identified in the agreement. The fair value of the specified funds is based on the fair value of the underlying assets that are held by the ceding company.  The ceding company uses a variety of sources and pricing methodologies, which are not transparent to the Company and may include significant unobservable inputs to value the securities held in distinct portfolios, therefore the valuation of these funds withheld assets are considered Level 3 in the fair value hierarchy.

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.

Federal Home Loan Bank Advances: FHLB advances are stated at the outstanding principal balances and the carrying value approximates fair value.

Policyholder deposits in deposit-type contracts: The fair value for policyholder deposits deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach.  Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

20

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

The estimated fair values of the Company’s financial assets and liabilities at June 30, 2023 and December 31, 2022 are as follows: 

	June 30, 2023
	(unaudited)
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	3,897,749	$	3,897,749	$	3,897,749	$	-	$	-
Limited partnership interests		262,000		262,000		-		-		262,000
Mortgage loans on real estate		24,294,735		24,294,735		-		-		24,294,735
Investment income due and accrued		2,363,115		2,363,115		-		-		2,363,115
Reinsurance contract allocated hedge		1,013,677		1,013,677		-		-		1,013,677
Policy loans		37,228		37,228		-		-		37,228
Total Financial Assets (excluding available for sale investments)	$	31,868,504	$	31,868,504	$	3,897,749	$	-	$	27,970,755
Financial Liabilities:
Federal Home Loan Bank advance	$	1,000,000	$	1,000,000	$	-	$	-	$	1,000,000
Policyholder deposits in deposit-type contracts		78,511,330		65,826,853		-		-		65,826,853
Total Financial Liabilities	$	79,551,330	$	66,826,853	$	-	$	-	$	66,826,853

	December 31, 2022
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	4,091,507	$	4,091,507	$	4,091,507	$	-	$	-
Mortgage loans on real estate		23,790,073		23,790,073		-		-		23,790,073
Investment income due and accrued		2,086,365		2,086,365		-		-		2,086,365
Reinsurance contract allocated hedge		724,998		724,998		-		-		724,998
Policy loans		34,980		34,980		-		-		34,980
Total Financial Assets (excluding available for sale investments)	$	30,727,923	$	30,727,923	$	4,091,507	$	-	$	26,636,416
Financial Liabilities:
Federal Home Loan Bank advance	$	1,000,000	$	1,000,000	$	-	$	-	$	1,000,000
Policyholder deposits in deposit-type contracts		79,035,350		67,741,524		-		-		67,741,524
Total Financial Liabilities	$	80,035,350	$	68,741,524	$	-	$	-	$	68,741,524

Note 5.   Income Tax Provision

No income tax expense or (benefit) has been reflected for the three or six months ended June 30, 2023 and 2022 due to loss carryforwards and a change in the valuation allowance pertaining to the deferred tax asset. 

The net operating loss carryforwards for the Company are $9,630,952 as of December 31, 2022 and estimated to be $9,750,000 as of June 30, 2023. The components of the deferred tax assets and liabilities due to book and tax differences are the following: fixed asset depreciation, net operating loss carryforward, net unrealized gains (losses) on investment securities, policyowner benefit reserves and deferred acquisition costs. The deferred tax asset net of valuation allowance is $3,294,522 as of both June 30, 2023 and December 31, 2022.

21

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

Note 6. Contingencies and Commitments

Investment Commitments

The Company has outstanding commitments to fund investments in limited partnership interests. Such unfunded commitments were $ 1,738,000 and $ 2,000,000 as of June 30, 2023 and December 31, 2022, respectively.

Note 7.   Subsequent Events

All of the effects of subsequent events that provide additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing the consolidated financial statements, are recognized in the consolidated financial statements. The Company does not recognize subsequent events that provide evidence about conditions that did not exist at the balance sheet date but arose after, but before the consolidated financial statements are issued. In some cases, unrecognized subsequent events are disclosed to keep the consolidated financial statements from being misleading.

The Company has evaluated subsequent events through August 14, 2023, the date on which the consolidated financial statements were issued.  

22

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this Form 10-Q. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, including those relating to the COVID-19 pandemic, and many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.

Overview

USAC was formed as a Kansas corporation on April 24, 2009 for the purpose of raising capital to form a new Kansas-based life insurance company. We presently conduct our business through our five wholly-owned subsidiaries: USALSC, a life insurance corporation; DCLIC, a life insurance corporation; USALSC-Montana, a life insurance corporation; USAMC, an insurance marketing corporation; and USAIC, an investment management corporation

On January 2, 2012, USALSC was issued a Certificate of Authority to conduct life insurance business in the State of Kansas. We began third party administrative services in 2015.

On August 1, 2017, the Company merged with Northern Plains Capital Corporation with the Company being the ultimate surviving entity. As a result of this merger, the Company acquired Dakota Capital Life Insurance Company which became a wholly owned subsidiary of USALSC.

On December 14, 2018, the Company acquired Great Western Life Insurance Company. Great Western Life Insurance Company was renamed US Alliance Life and Security Company – Montana and is a subsidiary of USALSC.

The Company assumes business under three reinsurance treaties. On January 1, 2013, the Company entered into an agreement to assume 20% of a certain block of health insurance policies from Unified Life Insurance Company. On September 30, 2017, the Company entered into and agreement (the "2017 ALSC Agreement") to assume 100% of a certain block of life insurance policies from American Life & Security Company ("ALSC"). On April 15, 2020, with an effective date of January 1, 2020, the Company entered into an agreement with ALSC (the "2020 ALSC Agreement") to assume a quota share percentage of a block of annuity policies. As of December 31, 2022, the Company had assumed $52.3 million in annuity deposits under the 2020 ALSC Agreement. Effective December 31, 2020 USALSC entered into an agreement with ALSC, which provided for ALSC to recapture all reserves previously ceded to USALSC with respect to a portion of the 2017 ALSC Agreement.

Critical Accounting Policies and Estimates

Our accounting and reporting policies are in accordance with GAAP. Preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanation of our accounting policies and the estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of our results of operations and financial position. A detailed discussion of significant accounting policies is provided in this report in the Notes to Consolidated Financial Statements included with this annual report.

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Valuation of Investments

The Company's principal investments are in fixed maturity, mortgages, and equity securities. Fixed maturity, classified as available for sale, are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in comprehensive income (loss). Our fixed income investment manager utilizes external independent third-party pricing services to determine the fair values of investment securities available for sale.  Equity securities are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in net income (loss).

The recognition of credit losses on debt securities is dependent on the facts and circumstances related to the specific security. If we determine a credit loss exists, the difference between amortized cost and fair value is recognized in the income statement.  Our membership in the Federal Home Loan Bank (“FHLB”) provides additional liquidity which further reduces the likelihood that we would be required to sell a security prior to recovery.  

Deferred Acquisition Costs

Incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to a product sale and would not have been incurred by us had the sale not occurred, are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.

Value of Business Acquired

Value of business acquired (“VOBA”) represents the estimated value assigned to purchased companies or insurance in- force of the assumed policy obligations at the date of acquisition of a block of policies. At least annually, a review is performed of the models and the assumptions used to develop expected future profits, based upon management’s current view of future events. VOBA is reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. Management’s view primarily reflects our experience but can also reflect emerging trends within the industry. Short-term deviations in experience affect the amortization of VOBA in the period, but do not necessarily indicate that a change to the long-term assumptions of future experience is warranted. If it is determined that it is appropriate to change the assumptions related to future experience, then an unlocking adjustment is recognized for the block of business being evaluated. Certain assumptions, such as interest spreads and surrender rates, may be interrelated. As such, unlocking adjustments often reflect revisions to multiple assumptions. The VOBA balance is immediately impacted by any assumption changes, with the change reflected through the statements of comprehensive income as an unlocking adjustment in the amount of VOBA amortized. These adjustments can be positive or negative with adjustments reducing amortization limited to amounts previously deferred plus interest accrued through the date of the adjustment.

In addition, we may consider refinements in estimates due to improved capabilities resulting from administrative or actuarial system upgrades. We consider such enhancements to determine whether and to what extent they are associated with prior periods or simply improvements in the projection of future expected gross profits due to improved functionality. To the extent they represent such improvements, these items are applied to the appropriate financial statement line items in a manner similar to unlocking adjustments.

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VOBA is also reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. If it is determined from emerging experience that the premium margins or gross profits are less than the unamortized value of business acquired, then the asset will be adjusted downward with the adjustment recorded as an expense in the current period.

Goodwill

Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. Goodwill is tested for impairment at least annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred.

We assess the recoverability of indefinite-lived intangible assets at least annually or whenever events or circumstances suggest that the carrying value of an identifiable indefinite-lived intangible asset may exceed the sum of the future discounted cash flows expected to result from its use and eventual disposition. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

Reinsurance

In the normal course of business, we seek to limit aggregate and single exposure to losses on risk by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. We diversify our credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish our primary liability under the policies written. We regularly evaluate the financial condition of our reinsurers including their activities with respect to claim settlement practices and commutations, and establish allowances for uncollectible reinsurance recoverable as appropriate.

Future Policy Benefits

We establish liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by using a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables. Such liabilities are reviewed quarterly by an independent consulting actuary.

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Income Taxes

Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. We have no uncertain tax positions we believe are more-likely-than-not that the benefit will not to be realized.

Recognition of Revenues

Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of investment earnings of the deposits, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the Consolidated Statements of Cash Flows.

Embedded Derivatives

The Company has entered into coinsurance funds withheld arrangement with ALSC which contains an embedded derivative. Under ASC 815, the Company assesses whether the embedded derivative is clearly and closely related to the host contract. The Company bifurcates embedded derivatives from the host instrument for measurement purposes when the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument. The Company has two different embedded derivatives, the first of which existed prior to the transfer of the funds withheld account, which is reported on the consolidated balance sheets in funds withheld under coinsurance agreement, with changes in fair value recognized in the consolidated statements of comprehensive income (loss) in net investment gains (losses).  The second embedded derivative recognized after the funds withheld transfer is reported within reinsurance related assets on the balance sheet and within net investment gains (losses) on the statement of comprehensive income (loss).

Funds Withheld under Coinsurance Agreement

Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with the 2020 ALSC Agreement. For agreements written on a coinsurance funds withheld basis, assets that support the net statutory reserves or as defined by the treaty, are withheld and legally owned by the ceding company.  Interest is recorded in net investment income, net of related expenses, in the consolidated statements of comprehensive income (loss).  Funds withheld under coinsurance agreement are presented net of the embedded derivative, discussed above.  Under the terms of the 2020 ALSC Agreement the Company may assume custody of the assets in the funds withheld account once the Company qualifies as an "Qualified Institutional Buyer" (as that term is defined in Rule 144A under the Securities Act of 1933, as amended) and we satisfied the qualifications for this designation beginning in the fourth quarter of 2022.   The Company recorded the funds withheld assets at fair value on the date of transfer, which eliminated the embedded derivative component associated with the unrealized gains and losses within the funds withheld account.

Additionally, after the transfer of the funds withheld assets, ALSC continued to manage currency risk within the coinsured liability portfolio using derivative instruments.  In accordance with the coinsurance agreement, ALSC allocates a proportion of the derivative activity it manages to the Company, which is settled quarterly as part of the reinsurance settlement.  As the derivative allocation is not clearly and closely related to the host contract, the Company recognizes an embedded derivative equal to the fair value of the derivative allocation.  

Mortgage Loans on Real Estate 

Mortgage loans on real estate, including mortgage loan participations, are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances.  Interest income is accrued on the principal amount of the mortgage loans based on its contractual interest rate.  Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans until probable the Company will not receive interest or the loan is 90 days past due.  Interest income, amortization of premiums, accretion of discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of comprehensive income (loss).

A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement.  

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Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of foreclosure or is otherwise collateral-dependent, or the loan’s market value if the loan is being sold. These evaluations are revised as conditions change and new information becomes available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro-economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio.

Any interest accrued or received on the net carrying amount of the impaired loan will be included in investment income or applied to the principal of the loan, depending on the assessment of the collectibility of the loan. Mortgage loans deemed to be uncollectible or that have been foreclosed are charged off against the valuation allowances and subsequent recoveries, if any, are credited to the valuation allowances. Changes in valuation allowances are reported in net investment gains (losses) on the consolidated statements of comprehensive income (loss).

Other Invested Assets 

Other invested assets include collateral loans and private credit investments. The collateral loans and private credit investments are carried at fair value.  The inputs used to measure these assets are classified as Level 3 within the fair value hierarchy.

Mergers and Acquisitions

On May 23, 2017 the Company entered into a definitive merger agreement with Northern Plains Capital Corporation. The merger transaction closed on August 1, 2017. NPCC shareholders received .5841 shares of US Alliance Corporation stock for each share of NPCC stock owned. USAC issued 1,644,458 shares of common stock to holders of NPCC shares.

On October 11, 2018 the Company entered into a stock purchase agreement with Great Western Insurance Company to acquire Great Western Life Insurance Company. The transaction closed on December 14, 2018. USALSC paid $500,000 to acquire all of the outstanding shares of GWLIC.

Effective December 31, 2020, DCLIC acquired a block of life insurance policies according to the terms of an assumption agreement with ALSC. The Company acquired fixed maturity securities and cash of $9,181,100, assumed liabilities of $10,972,785 and recorded VOBA of $2,163,541.

New Accounting Standards

A detailed discussion of new accounting standards is provided in the Notes to Consolidated Financial Statements beginning on p. 8 of this quarterly report.

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Discussion of Consolidated Results of Operations

Total Income. Insurance revenues are primarily generated from premium revenues and investment income. Total income for the six months ended June 30, 2023 and 2022 are summarized in the table below.

	Six Months Ended June 30,
	2023		2022
	(unaudited)
Income:
Premium income	$	6,602,485	$	6,726,209
Net investment income		3,289,494		2,570,687
Net investment gains (losses)		890,476		(2,154,307	)
Other income		170,743		160,186
Total income	$	10,953,198	$	7,302,775

Our first six months 2023 total income increased to $10,953,198, an increase of $3,650,423 or 50% from the 2022 first six months total income of $7,302,775. The increase is driven by increased net investment income and net investment gains.   The Company was required to implement a new accounting standard in 2019 which results in unrealized gains and losses on equity securities being included in total income. This standard continues to result in increased volatility in total income and is a driver of increased total income.

Total income for the three months ended June 30, 2023 and 2022 are summarized in the table below.

	Three Months Ended June 30,
	2023		2022
	(unaudited)
Income:
Premium income	$	3,261,160	$	3,363,953
Net investment income		1,783,884		1,419,065
Net investment gains (losses)		543,374		(1,421,654	)
Other income		86,955		80,621
Total income	$	5,675,373	$	3,441,985

Our second quarter 2023 total income increased to $5,675,373, an increase of $2,233,388 or 64% from the second quarter of 2022 total income of $3,441,985. The increase is driven by increased net investment income and net investment gains.

Premium income: Premium income for the first half of 2023 was $6,602,485 compared to $6,726,209 for the same period in 2022, a decrease of $123,724 or 2%. The decrease was driven by an increase in ceded premiums. Even though it is a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.

Direct, assumed and ceded premiums for the six months ended June 30, 2023 and 2022 are summarized in the following table.

	Six Months Ended June 30,
	2023			2022
	(unaudited)
Direct	$	4,759,700		$	4,795,093
Assumed		2,528,845			2,522,928
Ceded		(686,060	)		(591,812	)
Total	$	6,602,485		$	6,726,209

The Company continuously searches for new product and distribution opportunities to continue to increase premium production on both a direct and assumed basis.

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Premium income for the second quarter of 2023 was $3,261,160 compared to $3,363,953 for the same period in 2022, a decrease of $102,793 or 3%. The decrease was driven a reduction in direct premiums and by an increase in ceded premiums. Even though it is a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.

Direct, assumed and ceded premiums for the three months ended June 30, 2023 and 2022 are summarized in the following table.

	Three Months ended June 30,
	2023			2022
	(unaudited)
Direct	$	2,372,102		$	2,418,559
Assumed		1,249,644			1,235,113
Ceded		(360,586	)		(289,719	)
Total	$	3,261,160		$	3,363,953

Investment income, net of expenses: The components of net investment income for the six months ended June 30, 2023 and 2022 are as follows:

	Six Months Ended June 30,
	2023			2022
	(unaudited)
Fixed maturities	$	2,895,537		$	559,262
Mortgages		1,003,013			116,350
Equity securities		394,800			312,498
Funds withheld		-			1,621,509
Other invested assets		100,865			-
Cash and cash equivalents		35,960			5,471
		4,430,175			2,615,090
Less investment expenses		(1,140,681	)		(44,403	)
	$	3,289,494		$	2,570,687

Net investment income for the first half of 2023 was $3,289,494, compared to $2,570,687 for the same period in 2022, an increase of $718,807 or 28%. The increase is driven by an increase in net yields.

The components of net investment income for the three months ended June 30, 2023 and 2022 are as follows:

	Three Months Ended June 30,
	2023			2022
	(unaudited)
Fixed maturities	$	1,856,114		$	283,929
Mortgages		493,991		$	88,959
Equity securities		184,430			157,824
Funds withheld		-			921,201
Other invested assets		54,925			-
Cash and cash equivalents		21,939			5,011
		2,611,399			1,456,924
Less investment expenses		(827,515	)		(37,859	)
	$	1,783,884		$	1,419,065

Net investment income for the second quarter of 2023 was $1,783,884, compared to $1,419,065 for the same period in 2022, an increase of $364,918 or 26%. The increase is driven by an increase in net yields.

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Net investment gains (losses): Accounting standards require that the unrealized gains and losses on equity securities be reported as income on the consolidated statements of comprehensive income (loss). For the six months ended June 30, 2023, net investment gains is comprised of $356,444 of unrealized gains on our equity portfolio, net realized gains including net credit losses recognized of $36,879, and a gain on the unrealized change in the fair value of our embedded derivative of $497,153. For the six months ended June 30, 2022, net investment losses is comprised of $1,463,629 of unrealized losses on our equity portfolio, net realized gains of $623 and a loss on the change in the fair value of our embedded derivative of $691,301.

Realized gains and losses related to the sale of securities for the six months ended June 30, 2023 and 2022 are summarized as follows:

	Six Months Ended June 30,
	(unaudited)
	2023			2022
Gross gains	$	9,857		$	3,164
Gross losses		(88,740	)		(2,541	)
Realized gains (losses)	$	(78,883	)	$	623
Mortgage loans on real estate		115,762			-
Decrease in allowance for credit losses	$	115,762		$	-

For the three months ended June 30, 2023, net investment gains is comprised of $110,318 of unrealized gains on our equity portfolio, net realized losses including net credit losses recognized of $161,431, and a gain on the unrealized change in the fair value of our embedded derivative of $594,487. For the three months ended June 30, 2022, net investment losses is comprised of $1,013,834 of unrealized losses on our equity portfolio, net realized gains of $1,264 and a loss on the change in the fair value of our embedded derivative of $409,083.

Realized gains and losses related to the sale of securities for the three months ended June 30, 2023 and 2022 are summarized as follows:

	Three Months Ended June 30,
	(unaudited)
	2023			2022
Gross gains	$	-		$	1,264
Gross losses		(263,968	)		-
Net security losses	$	(263,968	)	$	1,264
Mortgage loans on real estate		102,537			-
Decrease in allowance for credit losses	$	102,537		$	-

Other income: Other income for the six months ended June 30, 2023 was $170,743 compared to $160,186 in 2022, an increase of $10,557.

Other income for the three months ended June 30, 2023 was $86,955 compared to $80,621 in 2022, an increase of $6,334.

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Expenses. Expenses for the six months ended June 30, 2023 and 2022 are summarized in the table below.

	Six Months Ended June 30,
	2023		2022
	(unaudited)
Expenses:
Death claims	$	1,719,533	$	1,525,175
Policyholder benefits		3,497,865		3,613,384
Increase in policyholder reserves		1,986,195		2,143,630
Commissions, net of deferrals		362,516		392,215
Amortization of deferred acquisition costs		691,711		581,904
Amortization of value of business acquired		46,210		46,210
Salaries & benefits		736,116		684,320
Other operating expenses		949,201		1,038,613
Total expense	$	9,989,347	$	10,025,451

Expenses for the three months ended June 30, 2023 and 2022 are summarized in the table below.

	Three Months Ended June 30,
	2023		2022
	(unaudited)
Expenses:
Death claims	$	777,831	$	727,887
Policyholder benefits		1,933,830		1,953,399
Increase in policyholder reserves		938,317		947,280
Commissions, net of deferrals		190,785		201,881
Amortization of deferred acquisition costs		324,589		306,206
Amortization of value of business acquired		23,105		23,105
Salaries & benefits		372,828		360,261
Other operating expenses		425,688		497,211
Total expense	$	4,986,973	$	5,017,230

Death claims: Death benefits were $1,719,533 in the six months ended June 30, 2023 compared to $1,525,175 for the same period in 2022, an increase of $194,358 or 13%. This increase is attributable to our growing block of in-force pre-need life insurance policies and to increased group life claims. We expect these claims to grow as we continue to increase the size of our in-force business.  The COVID-19 pandemic has increased mortality rates for the entire United States population.

Death benefits were $777,831 in the three months ended June 30, 2023 compared to $727,887 for the same period in 2022, an increase of $49,944 or 7%. This increase is attributable to our growing block of in-force pre-need life insurance policies and to increased group life claims. We expect these claims to grow as we continue to increase the size of our in-force business. 

Policyholder benefits: Policyholder benefits were $3,497,865 in the six months ended June 30, 2023 compared to $3,613,384 for the same period in 2022, a decrease of $115,519 or 3%. The primary driver of this decrease is a reduction of assumed benefits and increased surrender charge income.

Policyholder benefits were $1,933,830 in the three months ended June 30, 2023 compared to $1,953,399 for the same period in 2022, a decrease of $19,569 or 1%. The primary driver of this decrease is increased surrender change income.

Increase in policyholder reserves: Policyholder reserves increased by $1,986,195 in the six months ended June 30, 2023, compared to $2,143,630 for the same period in 2022, a decrease of $157,435 or 7%. The reduced growth in reserves is the result of increased pre-need claims.

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Policyholder reserves increased by $938,317 in the three months ended June 30, 2023, compared to $947,280 for the same period in 2022, a decrease of $8,963 or 1%. The reduced growth in reserves is the result of increased pre-need claims.

Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies as well as commissions to agents on directly written business. Commissions, net of deferrals, were $362,516 in the six months ended June 30, 2023, compared to $392,215 for the same period in 2022, a decrease of $29,699. This decrease is due to a reduction in direct premiums.

Commissions, net of deferrals, were $190,785 in the three months ended June 30, 2023, compared to $201,881 for the same period in 2022, a decrease of $11,096. This decrease is due to a reduction in direct premiums.

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs ("DAC") was $691,711 in the six months ended June 30, 2023, compared to $581,904 for the same period in 2022, an increase of $109,807. The increase is driven by adjustments to DAC amortization resulting from increased annuity surrenders.

The amortization of DAC was $324,589 in the three months ended June 30, 2023, compared to $306,205 for the same period in 2022, an increase of $18,383. The increase is driven by adjustments to DAC amortization resulting from increased annuity surrenders.

Amortization of value of business acquired: The amortization of value of business acquired (“VOBA”) was $46,210 in the six months ended June 30, 2023 and 2022, respectively.  VOBA is being amortized straight-line over 30 years.

The amortization of VOBA was $23,105 in the three months ended June 30, 2023 and 2022, respectively.

Salaries and benefits: Salaries and benefits were $736,116 for the six months ended June 30, 2023, compared to $684,320 for the same period in 2022, an increase of $51,796 or 8%. The increase was driven by increased employee compensation costs and additional team members.

Salaries and benefits were $372,828 for the three months ended June 30, 2023, compared to $360,261 for the same period in 2022, an increase of $12,567 or 3%. The increase was driven by increased employee compensation costs and additional team members.

Other operating expenses: Other operating expenses were $949,201 in the six months ended June 30, 2023, compared to $1,038,613 for the same period in 2022, a decrease of $89,412 or 9%. The decrease is driven by decreased marketing and information technology costs.

Other operating expenses were $425,688 in the three months ended June 30, 2023, compared to $497,211 for the same period in 2022, a decrease of $71,523 or 14%. The decrease is driven by decreased marketing and information technology costs.

Net Income (loss): Our net income was $963,851 in the six months ended June 30, 2023 compared to net loss of $2,722,676 for the same period in 2022, an increase of $3,686,517. Our net income per share was $0.12 for the six months ended June 30, 2023 compared to net loss per share of $0.35 in the same period in 2022, basic and diluted. Our net income was $688,400 in the three months ended June 30, 2023 compared to net loss of $1,575,245 for the same period in 2022, an increase of $2,263,645. Our net income per share was $0.09 for the three months ended June 30, 2023 compared to net loss per share of $0.20 in the same period in 2022, basic and diluted.

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Discussion of Consolidated Balance Sheet

Assets. Assets have increased to $121,564,827 as of June 30, 2023, an increase of $3,266,530 or 3% from December 31, 2022 assets of $118,298,297. This is primarily the result of premium income and an increase in the market value of our fixed maturity securities.

Available for sale fixed maturity securities: As of June 30, 2023, we had available for sale fixed maturity assets of $66,806,217, an increase of $1,490,140 or 2% from the December 31, 2022 balance of $65,316,077. The increase is driven by an increase in the market value of these securities and additional purchases. If we hold our fixed maturity securities to maturity any change in market value is temporary.

Equity securities, at fair value: As of June 30, 2023, we had equity assets of $7,763,920, an increase of $368,876 or 5% from the December 31, 2022 balance of $7,395,044. This increase is driven by an increase in the market value of our equity securities.

Limited partnership interests: As of June 30, 2023, we had limited partnership interests of $262,000.  We had no such investments at December 31, 2022. This increase is driven by a new investment purchase.

Mortgage loans on real estate: As of June 30, 2023, we had mortgage loans on real estate of $24,294,735, an increase of $504,662 or 2% from the December 31, 2022 balance of $23,790,073. The increase is the result of acquiring additional mortgage loan participations.

Other invested assets: As of June 30, 2023, we had other invested assets of $2,165,653, an increase of $404,876 or 23% from the December 31, 2022 balance of $1,760,777. The increase is the result of acquisitions of additional assets.

Policy loans: As of June 30, 2023, our policy loans were $37,228, an increase of $2,248 or 6% from the December 31, 2022 balance of $34,980. The increase is a result of normal policy loan activity.

Real estate, net of depreciation: As of June 30, 2023, we had real estate assets of $1,359,005 related to the purchase of our home office building, a decrease of $14,711 from the December 31, 2022 balance of $1,373,716. The decrease is the result of depreciation. 

Cash and cash equivalents: As of June 30, 2023, we had cash and cash equivalent assets of $3,897,749, a decrease of $193,758 or 5% from the December 31, 2022 balance of $4,091,507. This decrease was the result of cash being deployed into invested assets.

Investment income due and accrued: As of June 30, 2023, our investment income due and accrued was $2,363,115 compared to $2,086,365 as of December 31, 2022, an increase of $276,750 or 13%. This increase is attributable to investment activity.

Reinsurance related assets: As of June 30, 2023, our reinsurance related assets were $185,542 compared to $125,549 as of December 31, 2022, an increase of $59,993. This increase is the result of changes in the net settlement due from reinsurers.

Deferred acquisition costs, net: As of June 30, 2023, our deferred acquisition costs were $5,187,919 compared to $5,629,002 as of December 31, 2022, a decrease of $441,083 or 8%. The decrease is the result of the amortization of DAC related to our 2020 ALSC Agreement.

Value of business acquired, net: As of June 30, 2023 our value of business acquired asset was $2,472,183 compared to $2,518,393 as of December 31, 2022, a decrease of $46,210 or 2%. The decrease is the result of amortization of VOBA.

Property, equipment and software, net: As of June 30, 2023 our property, equipment and software assets were $292,330, an increase of $159,855 from the December 31, 2022 balance of $132,475. This increase is the result of renovation of our home office HVAC system.

Goodwill: As of June 30, 2023 and December 31, 2022, our goodwill was $277,542. Goodwill was established as a result of our merger with NPCC. We have determined that there has been no impairment to our goodwill balance.

Deferred tax asset, net of valuation allowance:  The Company had a net deferred tax asset of $3,294,522 as of June 30, 2023 and December 31, 2022. No change in the net deferred tax asset was recorded in the first half of 2023.

Other assets: As of June 30, 2023, our other assets were $905,167, an increase of $432,892 or 92% from the December 31, 2022 balance of $472,275. This increase is the result of prepaid expenses.

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Liabilities. Our total liabilities were $112,373,670 as of June 30, 2023, an increase of $2,144,767 or 2% from our December 31, 2022 liabilities of $110,228,903. This increase is driven by an increase in our policy liabilities and accounts payable.

Policy liabilities: Our total policy liabilities as of June 30, 2023 were $110,192,643 compared to $108,737,803 as of December 31, 2022, an increase of $1,454,840 or 1%. This increase is the result of the growth of our in-force business.

Accounts payable and accrued expenses: As of June 30, 2023, our accounts payable and accrued expenses were $997,943 compared to $448,805 as of December 31, 2022, an increase of $549,138 or 122%. This increase is driven by reinsurance settlement payables.

Federal Home Loan Bank advance: As of June 30, 2023 and December 31, 2022, the Company has outstanding advances of $1,000,000 with the Federal Home Loan Bank of Topeka.

Shareholders’ Equity. Our shareholders’ equity was $9,191,157 as of June 30, 2023, an increase of $1,121,763 from our December 31, 2022 shareholders’ equity of $8,069,394. The increase in shareholders’ equity was driven by an increase in other comprehensive income (loss) and by our net income. The increase in other comprehensive income is the result of increased market value of our fixed maturity securities.

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Investments and Cash and Cash Equivalents

Our investment philosophy is reflected by the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities, mortgages and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of June 30, 2023 and December 31, 2022.

	June 30, 2023					December 31, 2022
	Carrying		Percent			Carrying		Percent
	Value		of Total			Value		of Total
Fixed maturities:	(unaudited)
US Treasury securities	$	726,745		0.7	%	$	1,025,087		1.0	%
Corporate bonds		16,371,631		15.4	%		15,869,078		15.3	%
Municipal bonds		5,628,753		5.3	%		5,420,409		5.2	%
Redeemable preferred stocks		3,215,855		3.0	%		3,355,615		3.2	%
Term Loans		18,065,322		17.0	%		18,149,718		17.6	%
Mortgage backed and asset backed securities		22,797,911		21.4	%		21,496,170		20.8	%
Total fixed maturities		66,806,217		62.8	%		65,316,077		63.1	%
Mortgage loans		24,294,735		22.8	%		23,790,073		22.9	%
Other invested assets		2,165,653		1.9	%		1,760,777		1.7	%
Equities:
Common stock		6,309,701		6.0	%		6,024,224		5.8	%
Preferred stock		1,428,219		1.3	%		1,370,820		1.3	%
Total equities		7,763,920		7.3	%		7,395,044		7.1	%
Limited partnership interests		262,000		0.2	%		-		-	%
Real estate, net of depreciation		1,359,005		1.3	%		1,373,716		1.3	%
Cash and cash equivalents		3,897,749		3.7	%		4,091,507		3.9	%
Total	$	106,549,279		100.0	%	$	103,727,194		100.0	%

The total value of our investments and cash and cash equivalents increased to $106,549,279 as of June 30, 2023 from $103,727,194 at December 31, 2022, an increase of $2,822,085 or 3%. Increases in investments are primarily attributable to additional purchases and increases in the market value of our securities.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2023 and December 31, 2022.

	June 30, 2023					December 31, 2022
	Fair		Percent			Fair		Percent
	Value		of Total			Value		of Total
	(unaudited)
AAA and U.S. Government	$	3,341,704		5.0	%	$	3,068,529		4.7	%
AA		11,749,024		17.6	%		11,582,642		17.7	%
A		18,364,387		27.5	%		17,142,623		26.2	%
BBB		28,911,505		43.2	%		27,520,644		42.1	%
BB		2,243,414		3.4	%		2,456,185		3.8	%
Not Rated - Private Placement		2,196,183		3.3	%		3,545,454		5.5	%
Total	$	66,806,217		100.0	%	$	65,316,077		100.0	%

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The amortized cost and fair value of debt securities as of June 30, 2023 and December 31, 2022, by contractual maturity, are shown below. Equity securities do not have stated maturity dates and therefore are not included in the following maturity summary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	As of June 30, 2023				As of December 31, 2022
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(unaudited)
Amounts maturing in:
One year or less	$	-	$	-	$	442,846	$	450,461
After one year through five years		17,284,997		17,076,966		17,048,721		17,035,270
After five years through ten years		6,230,771		6,085,051		5,498,364		5,340,498
More than 10 years		20,965,866		17,630,434		21,337,372		17,638,063
Redeemable preferred stocks		3,627,683		3,215,855		3,875,526		3,355,615
Mortgage backed and asset backed securities		23,753,821		22,797,911		22,412,895		21,496,170
Total amortized cost and fair value	$	71,863,138	$	66,806,217	$	70,615,724	$	65,316,077

Market Risk of Financial Instruments

We hold a diversified portfolio of investments that primarily includes cash, bonds, equity securities, mortgage loans, and other invested assets. Each of these investments is subject to market risks that can affect their return and their fair value. A significant percentage of the investments are fixed maturity securities including debt issuances of corporations, US Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk. The Company's investment portfolio, including the creditworthiness and valuation of investment assets, as well as availability of new investments may be adversely affected as a result of market developments related to the COVID-19 pandemic and uncertainty regarding its ultimate severity and duration.

Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest represents the greatest portion of an investment's return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs.

We work to mitigate our exposure to adverse interest rate movements through laddering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet our obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.

Additionally, USALSC is a member of the FHLB of Topeka, which provides access to liquidity and further reduces the likelihood of disposing of fixed maturities at a loss.

Credit Risk

We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty associated with an obligor's ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. We manage our credit risk through established investment policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management and USAC's Board of Directors.

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Liquidity and Capital Resources

The impact of COVID-19 on the Company is evolving, and its future effects are not yet quantified. The Company continues to monitor the affects and risks of COVID-19 to assess its impact on the Company's business, sales, financial condition, results of operations, liquidity and capital position. Death claims have increased 13% from first half of 2022, but it is currently impossible to quantify the amount of such increase that can be attributed to COVID-19 deaths and deaths not directly attributable to COVID-19.

Premium income, deposits to policyholder account balances, and investment income are the primary sources of funds while withdrawals of policyholder account balances, investment purchases, policy benefits in the form of claims, and operating expenses are the primary uses of funds. To ensure we will be able to pay future commitments, the funds received as premium payments and deposits are invested in primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will in the future meet our ongoing cash flow needs. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. Cash flow projections and cash flow tests under various market interest scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. As a member of the Federal Home Loan Bank, USALSC has immediate access to additional cash liquidity, if needed.

Net cash provided by operating activities was $3,562,777 for the six months ended June 30, 2023. The primary sources of cash from operating activities were premiums received from policyholders as well as investment income. The primary uses of cash for operating activities were for payments of commissions to agents and settlement of policy liabilities. Net cash used in investing activities was $2,261,517. The primary use of cash was the purchase of fixed maturity, mortgage, and equity investments. Cash used by financing activities was $1,495,018. The primary uses of cash were surrenders on deposit-type contracts.

At June 30, 2023, we had cash and cash equivalents totaling $3,897,749. We believe that our existing cash and cash equivalents are sufficient to fund the anticipated operating expenses and capital expenditures for the foreseeable future. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of USALSC and DCLIC, our insurance subsidiaries, is uncertain and may require additional capital as they continue to grow.

Impact of Inflation

Insurance premiums are established before the amount of losses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company”, the Company does not provide disclosure pursuant to this item.

ITEM 4.   CONTROLS AND PROCEDURES

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiaries, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

As required by Exchange Act Rule 13a-15(b), management of the Company, including the Chief Executive Officer and the Vice President conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e). Based upon an evaluation at the end of the period, the Chief Executive Officer and the Vice President concluded that the disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports under the exchange act.

There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the three and six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

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Part II – Other Information

ITEM 1.  LEGAL PROCEEDINGS

We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of business, and we are not aware of any claims that could materially affect our financial position or results of operation.

ITEM 1A.  RISK FACTORS

As a “smaller reporting company”, the Company is not required to provide disclosure pursuant to this item.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the quarter ended March 31, 2023, the Company did not issue any shares of common stock pursuant to an offering to residents of the state of Kansas that was registered with the Kansas Securities Commissioner.

During the quarter ended June 30, 2023, the Company issued 2,000 shares of common stock, for aggregate consideration of $14,000, pursuant to a private placement offering to residents of the state of North Dakota (the “North Dakota Offering”).  Proceeds from the sale of shares in the North Dakota were used to finance the growth of DCLIC and to provide working capital for the Company. The North Dakota Offering and sales of shares thereunder were not registered with the SEC in reliance on an exemption for registration under Rule 506(b) of Regulation D under this Securities Act of 1933 (“Reg D”).  Shares are sold only to “accredited investors”, as that term is defined in Rule 501 of Reg D, and were not sold by any means of general advertisement or solicitation. 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5.  OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS

3.1	Articles of Incorporation of US Alliance Corporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form 10 filed on May 2, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.1)
3.1.1	First Amendment to Articles of Incorporation of US Alliance Corporation, filed as Exhibit 3.1.1 to the Company's Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference a Exhibit 3.1.1.
3.1.2	Second Amendment to Articles of Incorporation of US Alliance Corporation, filed as Exhibit 3.1.2 to the Company's Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.1.2.
3.2	Bylaws of US Alliance Corporation (filed as Exhibit 3.2 to the Company’s Registration Statement on Form 10 filed on May 2, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.2).
3.2.1	Amendment No. 1. to the bylaws of US Alliance Corporation, filed as Exhibit 3.2 to the Company's Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.2.1.
31.1*	Certification of Chief Executive Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certifications of the Chief Executive Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certifications of the Principal Financial Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	Inline XBRL Instance
101.SCH**	Inline XBRL Taxonomy Extension Schema
101.CAL**	Inline XBRL Taxonomy Extension Calculation
101.DEF**	Inline XBRL Taxonomy Extension Definition
101.LAB**	Inline XBRL Taxonomy Extension Labels
101.PRE**	Inline XBRL Taxonomy Extension Presentation
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

* Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized

	US Alliance
	Corporation
	(Registrant)
Date	August 14, 2023
By	/s/ Jack H. Brier
	Jack H. Brier, President and Chairman

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